Afghan authorities need to prevent a
repeat of the conditions that led to Kabul Bank’s collapse,
before the International Monetary Fund agrees to an economic
program, the institution’s regional chief said.

The Washington-based IMF recognizes the country’s progress
in dealing with Kabul Bank, in particular the decision to
liquidate it, Masood Ahmed, the head of the IMF’s Middle East
and Central Asia department, said in a Bloomberg News interview
yesterday. At the same time, IMF support is contingent on the
country’s strengthening its financial system, he said.

“We are ready to move forward and support the Afghan
authorities, including in the form of a new program, as soon as
some remaining actions which we have been discussing with them
for a number of weeks are undertaken,” according to Ahmed.

An agreement with the IMF on an economic program may make
about $125 million available to Afghanistan and signal the
fund’s approval of its policies, a condition for some
governments that provide assistance. An estimated 97 percent of
Afghanistan’s gross domestic product is generated by spending on
foreign troops and aid efforts, according to a U.S. Senate
report released this month.

Ahmed’s comments came as Afghan Finance Minister Omar Zakhilwal accused the institution of not wanting to conclude the
talks, calling future discussions with the IMF “a waste of my
time,” Reuters reported yesterday.

Kabul Bank

The government took over Kabul Bank, the country’s biggest
commercial financial institution, in September. Thousands of
depositors rushed to withdraw their money last year after
learning that Kabul Bank’s owners had lost hundreds of millions
of dollars they had lent to themselves.

“The cost of that kind of crisis is large for the budget,
it is large in terms of foregone expenditures in other areas, it
has reputational consequences for the financial sector and it
tends to overshadow the progress that has been made in so many
other areas in economic management in Afghanistan,” Ahmed said.

The central bank will seek expressions of interest by next
month for the purchase of Kabul Bank, and hopes to sell it by
October, central bank Governor Abdul Qadir Fitrat said last
month.

“Regarding the costs of Kabul Bank insolvency, a budget
allocation is a critical measure going forward to ensure that
additional tax revenues are used to begin paying for the
costs,” Ahmed said when asked what measures need to be taken.

He declined to confirm whether measures also include a
draft law to cut insider lending and bank owners’ powers, saying
that the focus has been on ensuring “that the kinds of problems
that happened in Kabul Bank do not recur elsewhere in the
financial sector.”

Afghan Law

The IMF has called for revisions to the existing “banking
law to improve corporate governance” among Afghanistan’s 17
commercial banks, an effort that Afghan officials said the
cabinet rejected in January.

The new legislation, drafted last year by the central bank,
would bar any shareholder from serving as a bank’s chief
executive officer or supervisory board chairman, central bank
Governor Fitrat said in a Feb. 26 interview at his office in
Kabul.

President Barack Obama has vowed to end the U.S. combat
role in Afghanistan by 2014, handing over security duties to
Afghan forces that the U.S. is training and equipping.